Weekend reading: Mifid II reveals hidden depths to fund charges

Where’s your fee-phobic passive investing co-blogger when you need him? That’s what I thought as I read an expose of hidden fees in the Financial Times on Monday.1

In conjunction with the similarly cost conscious Lang Cat consultancy, the FT has totted up the hidden fees on a variety of popular funds, as revealed by the new Mifid II trading regulations.

Mifid II requires funds to go beyond the ongoing charge figure (OCF). They must now also give a total cost, including transaction and trading costs and other charges.

The FT reports:

“…many investors pay almost double the OCF in the UK’s most popular funds once transaction costs are included.

This can go up to four times OCF if platform charges and performance fees are included.”

As you’d expect, some active funds don’t fare well under this particular shaft of sunlight.

For instance the FT highlights the Janus Henderson UK Absolute Return fund, which has an OCF of 1.06%, as well as transaction costs of 0.79%. If platform fees (viaHargreaves Lansdown) and a performance fee is added on, the total annual cost rises to an average of 3.82%.

But tracker funds have also found the receipt to extra charges down the back of their sofa. For example the BlackRock iShares FTSE UK All Stocks Gilt tracker fund has an OCF of 0.2%. With platform fees and transaction costs the cost rises to 0.75%.

Few Monevator readers should be shocked by the platform fee component of the analysis – our broker comparison table has long highlighted that particular burden of investing.

But transaction fees and similar data have been much harder to come by.

As Lang Cat director Mike Barrett says:

“It is grimy that it has taken some EU regulation for asset managers to tell investors what the true cost of investing is…

You have always been paying these fees, but now the fund groups have the good grace to tell you these costs upfront.”

Separately, Andy Agathangelou of lobby group The Transparency Task Force has written to the head of the Investment Association demanding an apology for a previous report from the latter that had claimed hidden fees were the “Loch Ness Monster of investments”.

And finally…

“Investors that panic and follow the herd are unlikely to succeed. It’s a recipe for failure. The world isn’t going to end. This baby isn’t going down, and this ship isn’t coming apart. You must be on board in order to reach your destination.”
– Frank Armstrong, Harriman’s New Book of Investing Rules

Thanks for reading! Monevator is a simply spiffing blog about making, saving, and investing money. Please do check out some of the best articles or follow our posts via Facebook, Twitter, email or RSS.

The answer, as old hands know, is: “Finishing up the Monevator book. Allegedly”. Watch this space. [↩]

Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]

I have a small pension with Baillie Gifford Managed (no available passive multi-asset option) which seems to have a 0.01% transaction cost – total cost at 0.43%. Seems the gap has narrowed quite a bit between it and VLS…

– HL (as expected?) do seem to have the best source of costs under a new tab ‘Costs’ from the various platforms I’ve looked at.
– Figures can be reconciled back to fund provider assuming they provide it (eg Vanguard)

@ZX – “The only factor that I care about with my trackers is how well they track the index (the tracking error) and how stable that error is (the volatility of the tracking error)”

I think this sounds right.
I can see that if you held, say, a FTSE100 tracker it would be feasible to do that.
But from a pragmatic point of view, say you have a VLS comprising a whole bunch of trackers covering equities/gilts/bonds how would you actually do that analysis? It would get quite tricky quite quickly I think?
Certainly compared to just looking up that it has an OCF of 0.22%?
Or is that analysis done for you and presented in the vanguard literature somewhere?

I investigated a Henderson high yield bond IT some time ago on behalf of a trust. Fact sheet said OCF 0.65,% plus performance fee. Highlight page in annual report said something like 1.3% but see note 9. Note 9 said ecxcl performance fee. Total charge was 2.02% and performance fee only went to zero with 3% capital loss. Buyer beware.